Monthly Archive for July, 2007

Rules

1. The agent works for the Vendor/Seller - ALWAYS
2. If in doubt refer to the 1st rule

I am often concerned by the amount of people on forums and chat boards who mention that they have a close connection with agents who bring them deals and great buy recommendations.

I have a few agents who may call with information, but never a great deal or any recommendations for anything. They do suggest something is cheap or under priced, but like training a puppy you need to train the agents to your rules.

Agents get paid by selling real estate. They take their commissions from a percentage of the sales price of the property. They do use a standard amount for the first $16,000 of the sales price then a percentage of the remaining sales price.

In a usual sales process the house is listed with a certain amount of space for the price to move a bit due to normal negotiations. If, as the buyer, you offer a lower price than the asking price you would expect that the vendor would counter sign your offer at another price higher than what you offered.

When selecting real estate you need to get a feel for the agent and how they like things to proceed. They may like you to accompany them in their car for the ‘inspection tour’ of properties you are interested in. Or they may like you to give a 10% deposit nothing less.

You need to let the agents know that you negotiate on the price or terms, you do not leave massive cash deposits unless you get something you want. Let the agent know that you are going to be reasonable in relation to their time and experience, but that you don’t want to be messed around.

If you find a good agent who respects your time and knows what your looking for, work with them, just spend more time concentrating on the houses rather than finding someone who can sell them to you.

Don Christie

I have noticed that there are more and more banks and financial institutions offering loans of 100% or more for the purchase of residential property. They even capitalize the fees, or add the fees on in other words, to the loan and you still get the First Home Owners Grant.

All very nice and fuzzy! Ideal if you have not saved any money, you get a house and you now have a loan for a house. The only trouble is what are you going to do with the $7000 from the government? Hopefully your answer is to pay the loan down and reduce the amount owing and the years remaining on the loan.

Now before you go running down to the banks and brokers you should exercise some caution before you get going with this style of lending. You need to know that 100% of the value one day may drop to 90% the next year, and then you have a shortfall. Share-traders who borrow money for investing know what a Margin Call is and that is very similar to what the banks may do in the event that their loan to you is now more than what the property is worth.

I can only imagine sleepless nights and a few arguments from mums and dads regarding the fact that they now owe more than what their new purchase is worth.

The problems in this shortfall situation really lies with the banks for a few reasons:

1. What do they now do with their loan debt to you? Ask you to sell to recoup what they can get now?
2. Do they ask you to make extra repayments over and above what you already pay? They lent you this money and now it is so highly leveraged and falling backwards, that they must be making a loss keeping you paying their loans. They may not even know the property has lost value if there is no real need for them to look, but if you fall short, they may make an estimate and discuss your options with them.

I do understand that there is a business for this kind of lending, perhaps it should be for investors that know what they are doing and have proved themselves to be business like in their actions rather than emotional in their investing.

The current rates reflect an interest rate of 2% above what the standard variable rate might be. There are massive fees capitalised onto the loan, like the insurance the banks use to ‘insure’ their risk of this lending to you. There will also be stamp duty and other fees included to your new loan balance. Already, before you have even made any repayments, you are paying interest on the fees and charges and this has got to worry you.

Normal lending criteria applies to ensure you are a suitable lend in this scenario. They also like to see you earn enough, save enough, live within your means and that you do not owe anything. They like to know you are going to pay on time EVERY time and that you will be a good risk for them.

The fact remains that home ownership is not for everyone. I estimate that 30% of Australians will never know what its like to have or even be eligible for a house of their own. So why put people at risk of serious financial hardships just to make money? I love the banks, but find it hard to give any kudos to this hard line lending. Its almost like loan sharking.

The banks know that a certain part of their business is to recoup the losses made by people failing to repay their mortgage. They do not like to have to quietly sell the house you have defaulted on, but will do so to recoup losses they have.

I like investment loans of 100% or more, as it enables a high rate of leverage, but unfortunately there are very few banks willing to do these without other property security.

Don Christie

One thing people often ask me is, what area or which suburb is going to be a good area to buy into. My usual answer is - go and look. Seriously though, not enough investors are investors, they are just punters or gamblers and they help create panic in a very steady market place.

Research can simply be getting the property section of the local newspaper and keeping an eye on ads for various areas. Ringing up agents from those ads to find out what the area is doing and who is buying in the area. Get a copy of the free booklets real estate agents advertise in to see how much houses are listed for.

On a ‘pay for information’ side of things you can subscribe to certain real estate websites and third party companies’ email or SMS alert systems, that can tell you when new property purchases go through. Sales information should be treated with a touch of caution, as Real Estate Agents want people to think that they got the best price for their client, whereas it may be different when the bank lodges their mortgage/transfer duty. So when you see the margin of $15,000 - $25,000 you can bet that it sold for the bottom figure, but the Real Estate Agent wants you to think he sold it for the higher price.

Simply visit the area and call about houses with signs that are For Sale/Sold and the agent will give you an idea on what prices they achieved. Ask agents to give you an idea of what you can expect to pay for what you are looking at purchasing, again just remember that they are always working for the vendors of houses for sale… never the buyers.

Get a buyers agent’s view on the prices; what you can expect to pay for an investment property, and returns on it. Ask them their feeling about the market and where things are headed. Again just remember that they do work for a commission on the sale of property to buyers and they will always have a great to excellent view of the market.

Get on the usual websites like realestate.com.au or others like owner.com.au or diysell.com.au. You will find that realestate.com.au is full of agents whilst the other two are owner based so you will get a good idea of what owners want for their property

Years ago I did a letter up saying that I was looking for property to buy and went and distributed it to houses in areas I wanted to buy in. I had a great response of two replies from almost 150 houses, but they were relieved to talk to me as an investor interested in buying houses. Although you may think of this as intruding, people have a choice in either throwing your letter away or ringing you. This is not 100% research, but you now have, at the very least, a price and a vendor who is keen to talk about their house, without the need of an agent destroying the whole deal. You only need to find one house slightly under market value to make it worth the effort.
In the word of Steve McKnight, ‘Success does come from doing things differently’ and its so very true in all areas of life and investing.

Research should be kept cheap and effective and before long you will know what is worth while and what is a bit expensive. After a while you get agents interested to see what you think certain properties are worth.

If you do nothing but research areas for 6 months, you will certainly know when a bargain is presented to you in the paper or by an agent. You just need to make sure you have the equity ready or a loan set to go!

Happy Hunting and Researching

Don Christie

I suppose the hardest thing, when you have the information and aspirations to buy an investment property, would be what should an investor buy?

This is where the time spent setting your mindset up properly to know what you want and need to keep growing as an investor.

Number one is to have a plan on what you are going to buy with the end in mind.

Let me explain; if you were to go out and buy the next house you go and see and it is a nice property. Its very well renovated and seems to be good value. Do you buy it? If so, why? If not, why not?

The numbers are the answer. They need to be right for your plan. They need to show that you know what you are doing; that you are able to manage this property and future investments that will come along. You need to have some investment properties that have what we call positive cash-flow, and some that are negative cash-flow. If you buy something now that slows or kills your chance at the next property then you have really, literally, just wasted thousands of dollars!

The reason we have a negative and a positive is that we are after long term appreciation or capital growth. The growth will slowly gain momentum and after a few years the properties will all be paying for themselves, which is when you go and buy more property. You can go and buy more property because of the fact your portfolio can survive without you being around to cover the shortfall each month.

Having a plan to buy the positive cash-flow property first will stand up very well when you go for the 2nd and 3rd property finance. After you can show that these three can cover themselves your plan should move to getting a negative cash flow property that has a higher chance of appreciating over the next 18-24 month period. After your portfolio has gone through this time-frame you will most probably find that your positive cashflow houses are due for a refinance. Your negative cashflow house should also be refinanced to enable any capital growth equity to be put to better use.

You may find it better to sell your houses to enable you to move onto bigger returning property transactions. The “never sell” attitude is a plan that does not consider any dead equity (lazy money) and, quite frankly, you would sell shares that were not being leveraged to better than bank rates, wouldn’t you? The same goes for property and property investing.

In relation to goals, they should be SMART:

• Specific. What exactly do you want to achieve?
• Measurable. Something you can accurately measure, whether it has been achieved or not.
• Achievable. You can hardly set a goal to buy every Sydney Harbour residence, but you can be realistic to say 5 properties per year.
• Realistic. Your goal must be able to be be achieved without undue hardships or pressures.
• Timed. You need to have a deadline for your goals.

Property developers and builders usually write their goals around Christmas/New Year. Business people usually write them around Jun 30th each year. I write and amend mine all the time when it comes to buying something large or with a tonne of equity built in.

My goals consist of getting 4 properties a year to buy and hold, and as many as I can get with as little money in the transaction as possible.

I am looking at doing a renovation in the coming months, so you can see my goals are open to change and react to what I find, can afford, and have time to do.

Plan your life and have goals you want to achieve. Write them down or you will be like everyone else when they say(and I hate it everytime people say this), ‘Oh its July, hasn’t the year gone fast’!

In the current market place there are very lazy investors, who know how to invest, but cannot be bothered or just do not want to do it. I know of two partners running what they call ‘buyers and sellers agency deals’. They are making heaps of cash fast with little to no risk.

They are finding vendors who do not want to list conventionally and they sell on the vendor’s behalf. Nothing new here yet, but what you will see next is nothing short of brilliant.

They then vendor finance people into the houses via vendor finance arrangements. These are more than likely to be by way of a second mortgage or selling by installments over a 30 year term. Back end profits for these guys is fantastic for risking very little. I know if I could help other people sell their property on a vendor finance agreement that I could do literally 1000’s of these with no bank loans or investments required. I would even have a team of ’staff’.

But here is the genius to the business plan…

The money to be made is when they on-sell their interest to another party, who understands the flexible situation of financing people in installment or terms contracts. They may even choose to keep the trickle of income dripping into their pockets each month for 30 years.

Investors who want above average returns in today’s market are looking out for people who can create a mortgage for sale at a discount rate and the return can go on for 30 years if not paid out sooner by the borrower.

For instance, these guys obtain a 2nd mortgage from the vendor and sell the property.
They hold onto the 2nd mortgage of $60,000 and collect the interest payable on that amount until it is refinanced by the buyer. The Mortgage is then sold to another investor for cash of say $40,000.

The benefits to the first investor is that they have created $40,000 from the transaction without having to spend a cent or be in a risky situation, like flipping.

The new 2nd Mortgage owner is happy as he bought an income stream for $40,000 and will be paid interest on it and then receive the full $60,000 at the end of the term. Roughly a 150% return on their money plus the interest payable on the money until such time as the mortgagee pays it out. The best thing is that the investment is secured by real estate and thats much safer than other high returning investments.

The original vendor is not having to pay commissions on the property to agents who will hope and pray their system works, they have a professional investor who, with their blessing sells the property to new homeowners for the best price they can.

It’s just a great strategy of swapping pieces of paper around to make a profit in real estate. Its also a great business in its own right as you can be flexible in doing as many transactions as time and vendors allow. The buyers will always be there, its just a matter of being there to put the whole deal together.

I found that its hard to find a vendor to commit to selling their house, but you only need to find one to make a rewarding income until you get the next. You may even find you really cannot fit work in any more.

Buying and selling houses is easy. You just go the the agent’s office, sign a few documents and then contact the bank. 30 days later you have a debt and a house! Its easy.

So why do most investors fail? They fail to set up a system that keeps breathing cash for them instead, even when they have no money to keep coming up with deposits.

May I suggest to you that for every property you buy, you ‘control’ another to make repayments for you? How? Well, if you buy a property for say$300,000 then rent it out, you will find you are short each week by $100. That is the difference between the rental coming in and the mortgage going out each week.

Ok, so how do we set this system up to make up the shortfall.

Lease Options.

Everyone understands a Lease. Most people have rented a property so you know your obligations and responsibilities. You pay a rental bond. You agree to pay the rent on time, when it is due. You also know how easy it is to stop the lease agreement too. You just give notice and usually you get your bond back minus any cleaning bills.

Options are used in the big end of town when people want to control things that they either don’t have the cash for, or are waiting for council or government approval etc. They give the option holder the right to buy something at a predetermined price in the future.

So when thinking residental real estate investing you need to get you head around controlling assets and not buying them. We all want the benefits from the real estate, but not the obligations of paying for it; Lease Options are a great tool to do just that.

You need to negotiate with the vendor or agent what price they would like to ’settle on’. Once you have that figure you can work with what the rent will be each week. You then need to work on a term or time frame for both the lease and the life of the option.

A great example is a house I offered a lease option on yesterday. Its a $1.5 Million Dollar canal front house, here on the Gold Coast, and would be worth $1.5 Million all day long. I said that I will pay the amount equal to the mortgage obligations per week. The vendor was happy because I had taken away the pain of making repayments for him. Next we worked on the term of the agreement. We both think that 24 months will be a good starting point with the possibility to extend after that. I said I was happy to pay $1.3 Million for his property either before the 24 month agreement ended or at the end. He countered with $1.35 Million. I could have asked for all the rent going to him to be taken from the $1.35 Million when I settle on the property, but I thought I had done quite well so far.

You can see I have a few directions I can go from here:

1. I can go and get bank financing and buy the house now and likely realise a profit of $150,000 fairly quickly.
2. Let the rent from the tenant cover my obligations each week.
3. Sell the deal to an investor who will cash me out of it today for the right to collect into the future.
4. Sell the property on to a family who is looking to try before they buy. In other words, a Lease Option themselves.

Most property solicitors understand Lease Options as they are simple and it’s easy to advise their clients. I like them because there are no banks involved.

These Options can take all sorts of directions and will increase your wealth ten fold in no time if you do it with integrity and honesty. Make your vendors happy that they can sell what they want and get relief from payments and the headaches of tenants.

On a side note, you will find your potential buyers like the lease options as they cannot be traced by solicitors and lawyers. People going through divorces or marriage disputes can get into property without their partners knowing about it, and therefore cannot do much about future profits or benefits realised. We don’t really need to know, but its just life!

Lease Optioning the World

Don Christie

The reserve bank is set to meet and discuss the current credit spending next Wednesday, and in all likelihood there will be a serious interest rate rise in the region of 0.25%. This is due to reports that Australians still continue to spend even after recent rate rises within the last 12 months.

What does this mean to home owners and residential investors? I refer to the Australian Bureau of Statistics’ figures where it states that 35% of the houses in Australia have a mortgage and to the tune of 40% of the value is the mortgage. That means on a $300,000 property homeowners have to find $12 more per week to satisfy the banks.

You don’t have to be a mathematician to work out that the average homeowner has to earn $15.40 just to take care of the extra amount needed each month. This is almost another hour’s work at some people’s professions. This takes into account tax being already taken from the employee’s salary.

$12 per month sounds like another coffee shop morning tea for those that don’t invest, but what about investors who look for better than average returns from their real estate ventures. They will suffer a little bit, but as the rental market starts to heat up we may see investors flooding the market and therefore negating the rate rise.

What about if the return on your property portfolio went down by $15 each property by 5 houses. That’s where some creative measures need to come out.

It may be the time to do a few small renovations or upgrades in your rental property to justify raising the rent. I suggest going and seeing your tenants and finding out what they would like to see happen to justify the increase in their rent. During the winter may be a great time, to ensure you have ceramic towel rails or a heat lamp in the bathroom. These cost $85 at Bunnings, but the tenant feels better for having those benefits for an extra $15 per week.

The tenants may have a child or children and you could provide a sandpit in the backyard. Although this may cost more, mums and dads realize that and may be happy to pay $15 more per month to justify your expense.You may also find that they are happy to extend their rental agreement for another 12-24 months, because you have found a solution to their needs.

So the obvious reaction to a rate rise would be to fix the rate for a period of time. This can be effective in the event of further rate rises, but can sometimes incur break costs and fees from your current financial institution.

Investors need to work out what the comfort factors for their tenants are. I have found that solving problems and making money come from creative thinking and asking questions.

Lets hope rate rises create happier tenants.

Don Christie

I have had mixed reports that sunny days are better than rainy days for ’shopping’ for houses, but there is a fair argument that on rainy days the amount of buyers would be less.

So why is it that when I ring agents on rainy days they are surprised to hear that I want to inspect one or more of their listings? May I suggest that the reason is that more investors are waiting for a sunnier day or better outside conditions.

I also know that if you are in negotiations over Christmas/New Year that the vendor may be happy to just give you what you want, at the price you want, just to be rid of the problem or to move on into the new year.

Not for one minute should you just buy a house due to major public holidays or the weather: I am only suggesting that if you are in the market for buying an investment property you should use those days and events as a great tool to bring the odds further in your favour.

Add this to other beneficial ideas like vendor financing or taking over the vendor’s mortgage obligations, and you are GOING to make money, with either fast cash or equity.

Happy House Hunting

Don